Economy

The probability for no Fed rate hike next week shot up to as high as 65%, according to CME Group data Wednesday morning.
Fed policymakers will resolve the question by watching macroeconomic reports as well as small banks for larger clues about the health of the financial sector.

Federal Reserve Board Chair Jerome Powell speaks at a news conference following a two-day meeting of the Federal Open Market Committee, Wednesday, Sept. 18, 2019, in Washington.
Patrick Semansky | AP

Markets have changed their mind — again — about what they think the Federal Reserve will do next week regarding interest rates.
In a morning where more banking turmoil emerged and stocks opened sharply lower on Wall Street, traders shifted pricing to indicate that the Fed may hold the line when it meets March 21-22.

The probability for no rate hike shot up to as high as 65%, according to CME Group data Wednesday morning. Trading was volatile, though, and the latest moves suggested nearly a 50-50 split between no rate hike and a 0.25 percentage point move. For most of Tuesday, markets indicated a strong likelihood of an increase.
Chairman Jerome Powell and his fellow Fed policymakers will resolve the question over raising rates by watching macroeconomic reports that continue to flow in, as well as data from regional banks and their share prices that could provide larger clues about the health of the financial sector.
Smaller banks have been under intense pressure in recent days, following the closures of Silicon Valley Bank and Signature Bank, the second- and third-largest failures in U.S. history. The SPDR Regional Bank ETF fell another 1.5% on Wednesday and is down more than 23% over the past five trading days.

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SPDR S&P Regional Bank ETF, 5 days

In a dramatic move Sunday evening, the central bank launched an initiative it called the Bank Term Funding Program. That will provide a facility for banks to exchange high-quality collateral for loans so they can ensure operations.
Inflows to impacted banks could be reflected through their share prices to indicate how well the Fed’s initiative is working out to maintain confidence in the industry and keep money flowing.

Central bank officials also will get data in coming days to see how active banks are in using the facility.
If banks are using the BTFP to a large extent, that could indicate significant liquidity issues and thus serve as a deterrent to raising rates. The last public report on that data will come Thursday, though the Fed will be able to monitor the program right up until its two-day meeting starts Tuesday.
The wagers on which way the Fed ultimately will go followed a rocky morning on Wall Street. Stocks were sharply lower in early trading, with the Dow Jones Industrial Average down more than 500 points.

Just as concerns started to diminish concerning banking sector health, news came that Credit Suisse may need a lifeline. Switzerland’s second-largest bank slumped after a major Saudi investor said it would not provide more capital due to regulatory issues.
The slump came even as economic data seemed to lessen the urgency around controlling inflation.
The producer price index, a measure of wholesale pipeline prices, unexpectedly dropped 0.1% in February, according to the Labor Department. While markets don’t often pay much attention to the PPI, the Fed considers it a leading indicator on inflation pressures.
On an annual basis, the PPI gain dropped to 4.6%, a big slide from the 5.7% reading in January that itself was revised lower. The PPI peaked at a rate of 11.6% in March 2022; the February reading was the lowest going back to March 2021. Excluding food and energy, the core PPI was flat on the month and up 4.4% year over year, down from 5% in January.
“The strong likelihood of continued rapid core PPI disinflation is at the heart of our relatively optimistic take on core [personal consumption expenditures] inflation and, ultimately, Fed policy,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Markets don’t pay much attention to the PPI, but the Fed does.”
The PPI data coupled with a relatively tame consumer price index report Tuesday. Markets last week were pricing in a potential half-point rate hike this month, but quickly pulled back.

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Today’s top storiesBlackRock chief Larry Fink raised the spectre of a “slow rolling crisis” after the failure of Silicon Valley Bank. Here’s our SVB coverage in full. Credit Suisse shares plunged more than 20 per cent to an all-time low after its biggest shareholder said it would not provide the bank with any more capital, reigniting the sell-off in bank stocks triggered by the SVB collapse. Consumer spending in China rebounded in the first two months of 2023, according to the first detailed overview of activity since Beijing ended its strict pandemic restrictions. Falling export demand and the lingering property sector downturn could still dent the momentum for recovery.For up-to-the-minute news updates, visit our live blogGood evening.If you’re rich, have a child under three, have a company that does a lot of R&D, and like going to the pub: congratulations — you’re a big winner from today’s UK Budget.Chancellor Jeremy Hunt claimed his “Budget for growth” made Britain the best place to invest of any advanced economy as he announced £9bn in tax breaks for business alongside a range of measures to keep people in work, including the expansion of free childcare and a surprise decision to scrap the £1mn lifetime cap on tax-free pension contributions.Hunt’s statement was as much about demonstrating stability after the catastrophic “mini” Budget of his predecessor Kwasi Kwarteng last September. The chancellor was able to brandish new analysis from the Office for Budget Responsibility which said the UK would avoid a technical recession this year. The economy is now set to shrink just 0.2 per cent, helped by falling gas prices, before recovering to an annual growth rate of 1.9 per cent by 2027. The UK’s overall performance, as economics editor Chris Giles notes, is still extremely sluggish: before the 2007-08 global financial crisis, it had been growing on average by about 2.75 per cent a year. As our Big Read explains, the fallout from the crisis was followed by further blows from austerity, the pandemic, and Brexit.The OBR also confirmed that the UK tax burden would reach the highest level since the second world war in 2027-28 while the ratio of public spending to GDP would settle at 43.4 per cent, its highest sustained level since the 1970s, highlighting the still fragile state of the government finances. Aside from extending free childcare to one- and two-year-olds and the improvements on pension allowances, other plans to tackle labour market inactivity included incentives for the sick, disabled and over-50s to go back to work or increase their hours. Hunt will be cheered by new data yesterday showing inactivity falling and wage growth slowing.While significant personal tax cuts will probably be saved until the autumn, there were a handful of measures to help struggling households. The energy support scheme will be extended until June, capping typical bills at £2,500; last year’s fuel duty cut will be kept and the rate frozen; and there will be an 11p per pint cut in duty on draught beer in pubs.There were also incentives for carbon capture and storage as part of the green transition, while the nuclear sector would be classed as “environmentally sustainable” so it could receive the same incentives as renewable energy.While Hunt said the improved outlook for the economy was evidence that “the declinists are wrong and the optimists are right,” Labour leader Sir Keir Starmer argued in response that the statement was merely stagnation dressed up as stability and “a huge giveaway to some of the wealthiest people in the country”.Working people were entitled after 13 years of Conservative rule to ask themselves if they were better off than when the party came to office, he said. “The resounding answer is no — and they know it,” he said.Key linksFT quick guideFull text of Hunt’s speechWhat it means for your walletFull coverageNeed to know: UK and Europe economyUK prime minister Rishi Sunak was warned not to relax City of London rules after the collapse of Silicon Valley Bank sparked calls for a rethink of planned regulatory overhauls.The US banking crisis could also deter the European Central Bank from committing to future interest rate rises. The ECB has already said it intends to raise borrowing costs by half a percentage point when its governing council meets tomorrow. Brussels warned Germany that a cap on electricity costs for industry would harm Europe’s single market. Splits have also opened among EU policymakers over including nuclear power in new funding rules aimed at boosting green industries. German energy giant Eon warned of another year of crisis for the sector.The EU is considering how to mirror US moves to stop companies circumventing export bans on sensitive technology by manufacturing it elsewhere. Need to know: Global economyUS consumer prices rose 6 per cent year on year in February, complicating the way forward for the US Federal Reserve and its programme of interest rate rises, and a slight fall from January’s 6.4 per cent. “Core” CPI inched up a more than expected 0.5 per cent from 0.4 per cent. Separate data today showed producer prices fell more than expected. The FT editorial board hit out at the Republicans’ game of chicken on the US debt.The US is set to become the world’s largest exporter of liquefied natural gas after developer Venture Global announced a big expansion on a Gulf Coast site to make it among the biggest LNG export plants in the world.Lebanon’s banks began a strike over “arbitrary” judicial decisions which they said had drained their already dwindling foreign reserves. The Lebanese pound has plummeted more than 98 per cent against the US dollar since the country went into economic meltdown in 2019.Argentina’s annual inflation rate passed 100 per cent for the first time since 1991 and is now among the highest in the world. The new data comes at a difficult time for the government of President Alberto Fernández, which had hoped to ease financial pressure on voters ahead of an election in October.Bolivians meanwhile are queueing for dollars as a crisis of confidence spreads, amid concerns that its economic model of the past two decades, fuelled by exports of natural gas to its neighbours, is now bust. Rating agency Fitch yesterday downgraded the country’s debt deeper into junk territory.Need to know: businessChatGPT maker OpenAI unveiled its new model GPT-4, which has “human-level performance” and can be accessed via the $20 paid version of ChatGPT. PwC said it was introducing a GPT chatbot named Harvey to speed up the work of its 4,000 lawyers. Pfizer offered to change its Covid-19 vaccine contract with the EU after member states complained of a glut of shots but some countries are angry at its insistence on payments for doses ordered that will never be delivered.Meta is cutting another 10,000 jobs, its second tranche in just four months, as part of its “year of efficiency”.Swedish start-up Northvolt is helping Europe compete with the US and Asia in a sector crucial to the green transition. Our Big Read explains how. UK battery start-up Britishvolt owed up to £160mn when it collapsed in January. Join FT journalists and guests for a subscriber-only webinar on the collapse of Silicon Valley Bank and the fallout for the banking sector and tech innovation this Thursday March 16, 4-5pm GMT (12-1pm ET). Register for your free subscriber pass and put your questions to our panel The World of WorkMany organisations are now offering employees in-house therapy at a time when public healthcare systems are stretched. Trained therapists can help managers identify problems in the workforce when hybrid or remote working can make mental health issues harder to spot.Online business education programmes are still proving popular despite a drop in demand for campus-based MBAs. But what’s the best way to pick and apply for a course? Find out and discover more in our new special report: Online learning.Some good newsSome potentially great news for the more than 8mn people in the US using insulin drugs. Novo Nordisk has followed Eli Lilly in slashing prices for some of its products by 75 per cent. More

The IMF is finalising a four-year lending programme worth $15.6bn for Ukraine, with a person close to the talks saying an announcement is “imminent”.The multilateral lender has been under pressure to pull together a more comprehensive aid package for the country, which has been economically devastated by Russia’s full-scale invasion in February 2022. The person said an announcement would come in a few days.In a statement released on Wednesday, the IMF affirmed that policy discussions with Ukrainian authorities had taken place in Warsaw, Poland, between March 8-15.“The discussions between IMF staff and the Ukrainian authorities were productive and very good progress has been made towards agreement on a set of policies that could underpin a fund-supported programme,” said Vahram Stepanyan, the IMF’s resident representative to Ukraine. “Building on this progress, staff and the authorities expect to conclude the discussions in the coming days.”Olena Bilan, chief economist at Kyiv-based investment bank Dragon Capital, said the new IMF programme is crucial — along with multibillion-dollar financing from other foreign partners including the US and EU — to help Ukraine “bridge its huge budget funding gap created by Russia’s invasion”.“The government seeks $43bn of external budget support this year, according to latest budget amendments, on top of $32bn in 2022,” Bilan said.

“While the IMF may provide only $4bn to $5bn this year, a fraction of total funding needs, the programme will anchor [the] government’s policies, will demonstrate wide support for Ukraine and thereby will help to ensure sufficient financing from other partners.”The World Bank has estimated that more than half of the country’s energy infrastructure has been destroyed by Russian attacks, exacerbating the blow to Ukraine’s economy.The size of the loan had been pegged at between $14bn-$16bn in initial discussions.The IMF previously granted Ukraine $2.7bn of emergency funding and in December approved a four-month programme for the country aimed at shoring up the economy and preparing it for a significant loan from the fund.According to figures released on Wednesday by Ukraine’s finance ministry, the country has received about $25bn in budget financing support from the US and EU, by far the largest donors, since Russia launched its full-scale invasion in February 2022.Ukraine has received more than $38bn in budgetary support from foreign countries and international financial institutions since the onset of the war. More

The producer price index fell 0.1% for February, below the estimate for a 0.3% increase.
Retail sales declined 0.4% for the month, in line with expectations and pulled lower by drops in auto sales as well as bar and restaurant receipts.
Finally, the Empire State Manufacturing survey for March, a gauge of activity in the New York region, posted a -24.6 reading, down 19 points from a month ago.

A customer looks over merchandise at a store on March 14, 2023 in Miami, Florida.
Joe Raedle | Getty Images

Wholesale prices posted an unexpected decline in February, providing some encouraging news on inflation as the Federal Reserve weighs its next move on interest rates.
The producer price index fell 0.1% for the month, against the Dow Jones estimate for a 0.3% increase and compared with a 0.3% gain in January, the Labor Department reported Wednesday. On a 12-month basis, the index increased 4.6%, well below the downwardly revised 5.7% level from the previous month.

Excluding food, energy and trade, the index rose 0.2%, down from the 0.5% gain in January. On an annual basis, that reading was up 4.4%, the same as in January.
A 0.2% drop in goods prices helped fuel the headline decrease, representing a sharp pullback from the 1.2% surge in January. Final demand foods tumbled 2.2%, while energy declined 0.2%.
Most of the drop in goods stemmed from a 36.1% plunge in chicken egg prices, which had soared over the past year.
In a separate important data point Wednesday, the Commerce Department reported that retail sales fell 0.4% in February, according to data that is not adjusted for inflation. The total was in line with expectations and dragged down by a 1.8% slide in auto sales.
Food services and drinking establishments, which had seen strong receipts over the past year, fell 2.2% for the month, though they were still up 15.3% on an annual basis. Furniture and home furnishing stores were off 2.5%, while miscellaneous retailers saw a 1.8% decline.

Also, the Empire State Manufacturing survey for March, a gauge of activity in the New York region, posted a -24.6 reading, down 19 points from a month ago. The reading represents the percentage difference between companies reporting expansion versus contraction. The Dow Jones estimate was for a -7.8 level.
The big drop came from precipitous decreases in new orders and shipments as well as inventories. Hiring edged lower as did the prices index.
The news comes the day after the Labor Department said that consumer prices rose another 0.4% in February, bringing the annual inflation rate to 6%.
Though that’s well above the 2% level the Fed considers ideal, the 12-month CPI rate was the lowest since September 2021.
Despite the downward drift in the annual inflation rate, and recent banking industry turmoil, financial markets still expect the Federal Reserve to increase interest rate when it meets next week.
Market pricing is pointing to a 0.25 percentage point increase in the federal funds rate, taking the benchmark borrowing level to a target range of 4.75%-5%.
However, futures contracts Wednesday morning also implied a peak, or terminal, rate of about 4.77%, indicating that the March increase would be the last before the Fed pivots away from a tightening remine that began a year ago.

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It is unusual for the central bank to comment on foreign policy given its responsibility is finance, suggesting that China is signalling it is ready to deploy a wide range of countermeasures in response to increasing tension with the West. The PBOC will “appropriately deal with the containment and suppression of the United States and the West”, the bank said in a statement published following an internal Communist Party committee study session.Relations between the world’s two largest economies have been tense for years but worsened last month after the United States shot down a balloon off the U.S. east coast that it says was a Chinese spying craft. While the U.S. has maintained it seeks to establish guardrails for the relationship, Xi has spoken of a need to “improve the national security system” and “build the people’s army into a great wall of steel that effectively safeguards national sovereignty, security and development interests”.China’s President Xi said on Wednesday that “frontrunners” should sincerely support other countries in their development, Chinese state media Xinhua reported. “One will not be seen in a more favourable light after blowing out others’ lamps, nor will they go further by blocking others’ paths,” Xinhua quoted Xi as saying.Xi made the remarks in a keynote address delivered at a meeting with world political parties.He added that, in pursuit of modernization, China will neither tread the old path of colonisation and plunder, nor the “crooked” path taken by some countries to seek hegemony once they grow strong, according to Xinhua.”EXTERNAL SHOCKS AND RISKS”China last week announced sweeping government reform, including the establishment of a new financial regulatory body that would take over some supervisory functions from the PBOC. The setting up of a national financial regulatory administration comes as Beijing seeks to rein in large corporate and financial institutions to shore up its economy in the face of “external shocks and risks”, as the foreign exchange regulator characterised the challenges facing the economy on Wednesday in a separate statement. The anticipated shocks and challenges from outside would likely complicate policy-making this year as China emerges from three years of austere COVID-19 policies that have weighed on its $18 trillion economy. The PBOC reiterated that it would step up financing for private, micro and small enterprises and that it will support reasonable bond financing needs of private companies. In recent years, the government has sought to tighten its grip on private businesses, by taking stakes in non-state enterprises or installing officials in large firms.”We will precisely and effectively implement the prudent monetary policy, keep an appropriate pace of loan issuance, and keep the total supply of money and credit at an appropriate amount and grow steadily,” the bank said. More

    Efforts by regulators and financial executives to ease contagion fears sparked by last week’s collapse of Silicon Valley Bank (SVB) had bought some brief stability to markets, but turmoil once more appeared to be taking over.Saudi National Bank cannot give more money to Credit Suisse as it cannot go above 10% ownership due to a regulatory issue, SNB’s chairman Ammar Al Khudairy told Reuters.European banks shares slid over 6%, European stocks were down 2.5% and U.S. stock futures pointed to a weak start for Wall Street shares. MARKET REACTION: STOCKS: Credit Suisse share trading was halted after heavy losses, last down over 20%, ING Group (NYSE:ING), ABN AMRO (AS:ABNd) were down over 6%. The euro zone volatility index shot up to its highest level since OctoberBONDS: U.S. and European bond yields fell sharply as investors flocked to safe-haven assets. German 2-year bond yields were down 30 basis points at 2.61%FOREX: The euro fell over 1% to $1.0605, the dollar index was up 0.7%.COMMENTS:ANTOINE BOUVET, SENIOR RATES STRATEGIST, ING, LONDON:”The Credit Suisse share price is falling and government bonds are rallying on the back of that. Still very much driven by the perceived health of the banking sector, but this time in Europe.”CARLO FRANCHINI, HEAD OF INSTITUTIONAL CLIENTS, BANCA IFIGEST, MILAN “Markets are wild. We move from the problems of American banks to those of European banks, first of all Credit Suisse.””This is dragging lower the whole banking sector in Europe. The shares accelerated losses after the Saudis said they’re not willing to support the bank any further. “I believe Credit Suisse’s crisis can be solved and the bank will not … go belly up. Once some calm returns to the markets, the problem will be who can take it over.” KASPAR HENSE, SENIOR PORTFOLIO MANAGER, BLUEBAY ASSET MANAGEMENT, LONDON”So the market is quite confused here on the stability of the bank (Credit Suisse) in general, and certainly doesn’t help if today the Saudis are coming out and saying that they will not increase the buffer, and so we think it will be dependent on the Swiss regulator to step in.”But in general, the balance sheet is in a much better position, with the European banks all highly regulated. That means they have substantial buffer beyond the equity portion on the senior and subordinated debt.That should, to some extent prevent an attack, but it didn’t. So, it is important that the European regulator makes clear that the underlying systemic risk, not only for deposits, but in the overall European banking market, is rather low.”RICHARD MCGUIRE, HEAD  OF RATES STRATEGY, RABOBANK, LONDON “We’re back off to the races, the markets are spooked by the Credit Suisse headline that the Saudi National Bank would not increase its stake. “That’s caused the Credit Suisse share price to fall, and the German curve has bull steepened – short end rates have fallen faster than long end – as the market reassesses yet again the outlook for ECB policy.”Credit Suisse is not new news, maybe it has come as a surprise to some, but the Saudi National Bank, was at the 10% limit before, they are at the 10% limit now, what has changed is the context. We think neither the Fed or ECB will be blown off track, inflation targeting is first and foremost. For today Credit Suisse is the dish of the day but we don’t think this will be a longer lasting trend (for bond markets).”SALMAN AHMED, GLOBAL HEAD OF MARCO AND STRATEGIC ASSET ALLOCATION, FIDELITY INTERNATIONAL, LONDON “Key central banks have all the tools now necessary to stem contagion. There was a lot of progress made after the 2008-2009 crisis. So there’s a variety of tools — we’ve seen that in the eurozone, we’ve seen that with the Fed, the Bank of Japan, obviously, can deploy a lot more liquidity there.     “So we are less concerned about widespread 2008-2009 systemic at risk. Overall, the banking sector is in much better shape. You may have these idiosyncratic issues which create wobbles. But I think the larger question remains, are we in that territory where financial instability is as important as inflation and growth? That’s the bigger question so we’re not out of the woods from that perspective.”    “I am less concerned about sustained contagion. For a few days, things can happen, but sustained contagion? We have the tools now.”More pressure would likely bring more tool deployment.” More

The Commerce Department said on Wednesday that retail sales dropped 0.4% last month. Data for January was revised higher to show retail sales rising 3.2% instead of 3.0% as previously reported. Economists polled by Reuters had forecast sales would fall 0.3%, with estimates ranging from a 1.0% decline to a 0.5% increase. Retail sales are mostly goods and are not adjusted for inflation. Economists said challenges adjusting the data for shifts in spending patterns at the end and start of the year as well as higher prices were among the factors that had exaggerated January’s retail sales surge. Nevertheless, consumers remain resilient despite higher borrowing costs as the Federal Reserve fights inflation. The U.S. central bank has raised its benchmark overnight interest rate by 450 basis points since last March from the near-zero level to the current 4.50%-4.75% range. With 1.9 job openings for every unemployed person in January, the tight labor market is generating higher wages. Consumers still have a huge amount of savings accumulated during the coronavirus pandemic.According to Bank of America (NYSE:BAC) Securities, an analysis of the bank’s card data showed that services spending significantly outperformed goods spending in February. While this suggests the rotation of spending back services helped to undercut retail sales last month, it should support overall consumer spending.Excluding automobiles, gasoline, building materials and food services, retail sales rose 0.5% last month. These so-called core retail sales increased 2.3%% in January, revised up from the previously reported 1.7%. Core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending, which accounts for more than two-thirds of the U.S. economy, slowed in the fourth quarter, helping to restrict GDP growth to a 2.7% annualized rate. Growth estimates for the first quarter are currently as high as a 2.6% pace. More

“Today the Office for Budget Responsibility forecast that because of changing international factors and the measures I take, the UK will not now enter a technical recession this year,” he said as he presented his budget in parliament.”Despite continuing global instability, the OBR report today that inflation in the UK will fall from 10.7% in the final quarter of last year to 2.9% by the end of 2023.” More